Woolworths shareholders are about to become unitholders in a new property trust – Shopping Centres Australasia Property (or SCA Property Group) – under a plan to spin-off and sell shares in its properties. Under the plan, shareholders will receive one unit in SCA for every five Woolworths (WOW) shares they own (that is, if you own 1,000 Woolworths shares, you will receive 200 units in the SCA Property Group).
SCA Property Group is being created via the transfer of 69 neighbourhood, sub-regional and freestanding shopping centres from Woolworths, with shareholders receiving an ‘in-specie’ distribution of units in the new listed property group. The proposal is subject to shareholder approval at the Woolworths annual general meeting (AGM) on 22 November.
SCA is separately seeking to raise around $425 million via an offer to the market and Woolworths shareholders.
Why is Woolworths creating the SCA Property Group?
Woolworths says its core business is retailing, and long-term real estate ownership is not considered to be part of that strategy. The creation of the trust will reduce the real estate held on its balance sheet by $1.27 billion, and generate net cash to Woolworths of around $850 million.
The distribution of SPA units provides Woolworths shareholders with the choice of whether they want to keep their new defensive property portfolio, sell the shares, or top up and increase their exposure.
Not stated of course is the fact that Woolworths has been trying to reduce its property portfolio for some time and following the global financial crisis, it hasn’t been swamped with buyers. This proposal is an elegant (though expensive) way of solving part of that problem – the transaction will cost $63.9 million.
The SCA Property Group
The SCA Property Group will comprise 69 shopping centres – 55 in Australia and 14 in New Zealand. The portfolio has been valued at $1.4 billion, with 56 completed properties valued at $1.1 billion and 13 properties under development valued on a completed basis at $0.3 billion.
All centres are anchored by a Woolworths Group business as a tenant. Woolworths Group stores will account for 75% of the gross lettable area and 61% of SCA’s gross income, and will have a weighted average lease expiry of 19.8 years. Woolworths is also providing SCA with a rental guarantee to cover vacant specialty tenancies for a period of two years.
Accompanying the unit distribution is an offer by SPA of 337 million new units to raise between $425-$506 million based on an indicative unit price of $1.26 to $1.50 for SPA. This compares with the unit net tangible assets (NTA) of $1.58.
On a forecast basis, the SPA Group is expected to distribute at a yield of between 6.9% and 8.3% for the first full financial year to June 2014, with a tax deferred component of around 35% to 40%. The details are as follows:
[1]Shareholder implications
For Woolworths shareholders, the SCA units will be treated from a tax perspective as part return of capital (non assessable) and part payment of an assessable fully franked dividend. At a price of $1.40, the capital return will be 50.7% or 71 cents, and the fully franked dividend of 69 cents.
As shareholders are receiving one unit in SCA for every five WOW shares they own, the $0.71 capital return will reduce the cost base of each Woolworth’s share by around $0.14. The dividend component is fully franked – so SMSFs will benefit to the extent of the excess imputation credits.
And with the SCA units, you will then have the choice to keep, sell or top up by potentially buying more units in the SCA offer described above. Unfortunately, many shareholders will be left with an unmarketable parcel in SCA (for example, if you own 1,000 WOW shares worth $29,700, you will own 200 SCA units worth just $280). SCA has said it will consider some form of small ‘sale facility’ to cater for these unitholders.
Our View on the SCA Offer
With the Woolworths Board unanimously recommending the transaction, it is a ‘fait accompli’ that the distribution and accompanying offer of SCA units will go ahead.
While the forecast distribution yield for the SCA Property Group is relatively attractive, it is difficult to see how the new manager can add substantial value to a portfolio of neighbourhood and sub-regional shopping centres. Sure, it has Woolworths on long-term leases, however it will need to generate “growth” income from the specialty stores that comprise the other 39% of the portfolio’s income or by purchasing or developing new centres.
For SMSFs, the tax deferred component is of limited benefit to funds in accumulation, and of no use to funds in pension. This is one of the reasons we maintain an “underweight call” on the listed real estate trust sector.
The bottom line
It is a pass on subscribing for new units in the SCA offer, and probably like many Woolworths’ shareholders, we will look to sell our annoyingly small holding. If you do wish to invest, the offer is due to open next Monday (15 October) and a product disclosure statement (PDS) is available at www.scapropertyoffer.com.au [2].
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.
Also in the Switzer Super Report
- Peter Switzer: Keep your hands off our super! [3]
- Lance Lai: Time to change my strategy on gold [4]
- Rudi Filapek-Vandyck: The broker wrap: RMD, MQA and CDD [5]
- Tony Negline: New guidelines for share transfers [6]